1.-ACCOUNTING FOR CONSIGNMENTS.ppt

ACCOUNTING FOR CONSIGNMENTSACC 106

ConsignmentSometimes, it is economical for manufacturer or wholesaler to appoint agents to sell goods on behalfDespatch of goods from one person to another person fort the purpose of of selling is termed as consignmentGoods so sent are termed as goods sent on consignmentThe sender is called consignor and the recipient consigneeGoods sent to agents remain property of the sending firm, not the agents.

Main features of consignmentConsignment of goods is not a sale.The consignee sells goods at the risk of the consignor.The sales proceed belong to the consignor and the consignee gets commissionThe relationship between the consignor and consignee is that of Principal and Agent

Remuneration to ConsigneeA commission is paid to the consignee for selling goods on behalf of the consignor If the consignee guarantees collection of all trade debts, additional commission called del credere commission is paidPeriodically the consignee sends an account sale (not an Account real but it is a statement) to consignor showing sales made, expenses paid, commission due and amount remitted or remittable to consignor

A specimen copy of an account saleAccount sale of 100 cases of sports materials sold on behalf of Paul

Signature Date

DateParticularsRateShsShsDec1Dec 1540 cases of radio10 radio Less: Expenses &Charges: Carriage 700 Custom duty 2000 Insurance 1300 Selling expenses 500 Less: Commission @5% of sales

Less: Amount remitted by bank draftBalance due1,2001,10048,00011.000

4,5002,95059,000

7,45051,550

20,00031,550

Important termsProforma Invoice: a statement prepared by the consignor stating the quantity, quality, and price of goods. Direct expenses: All expenses till the goods reach the godown of consignee. Non recurring nature and increase value of goods. E.g. freight, carriage, insurance, loading and unloading charges

Indirect expenses: incurred after the goods reach consignee godown.They are of recurring nature and do not increase the value of goods. E.g. godown rent, storage charges, advertisement expenses, salaries of salesmen etc.

Note: Distinction between direct and indirect expenses is of special importance at the time of valuation of unsold stock. Direct expenses form a part of the cost, therefore, a portion of such expenses is included in the cost of stock. Indirect expenses do not form part of the cost and are, therefore, excluded while valuing unsold stock

Consignors(the traders) RecordsConsignor usually maintains three accounts:Consignment AccountConsignee AccountGoods sent on Consignment account

Consignors(the traders) RecordsFor each consignment to an agent a separate consignment account is opened.Think of it as a trading profit and loss account for each consignmentThe purpose is to calculate the net profit or loss on each consignment

On sending goods to consignee With the cost of the goods Dr. Consignment accountCr. Goods sent to on Consignment account (stock a/c)Expenses paid or incurred in connection with the consignmentDr. Consignment accountCr. Cash/bank

Expense of the agent(consignee) and sales receiptOn receipt of account of sales the consignor enters those details in his books. 3. With the Sales made by the consignee Dr. Consignees accountCr. Consignment account4. With the expenses incurred by the consigneeDr. Consignment accountCr. Consignees account5. With commission of consignee Dr. Consignment accountCr. Consignees account

6. With the money received from consignee Dr. Cash/BankCr. Consignees account

The balancing figure on the consignment account is a profit or loss on consignment to be taken to the main Income Statement The balance on Goods sent on Consignment transferred to Income Statement in the determination of gross profit.

Consignee (the agents) RecordsOn receiving the consignment, no entry is made in books of account. The goods do not belong to the consignee but consignor. However, a memorandum record will be made by the consignee, showing all details of the goods received.3. With cash from sales of consignment Dr. Cash/Debtors Cr. Consignor a/c

Entries to Record Consignments IN THE BOOKS OF CONSIGNEE contd2. Payments of consignment expensesDr. Consignor accountCr. Cash/bank account4. Commission earnedDr. Consignor accountCr. Profit and loss account5. Cash to settle balance shown on account of sale Dr. Consignors account Cr. Cash book(The credit balance on consignor account represents amount due to the consignor)

ExamplePaul of Mwanza, whose financial year ends on 31 December, consigned goods to Anneth, his agent in Mombasa. All transactions were started and completed in 2013.(i) January 15: Paul consigned goods costing Shs 1,000,000(ii) February 27: Paul paid carriage to Mombas Shs 100000

Anneth, the consignee, sends an account of sales on July 31 when all the goods have been sold. It shows: Sales amounted to 1,500,000. Anneth expenses were: import duty, Shs 50,000, distribution expenses, 60,000, Commission agreed at 6 percent on sales amounted 90000. Anneth paid balance owing 1,300,000Books of Paul

Pauls Books

Consignment to Angel, Mombasa, Kenya20132013Shs2013ShsJan15Goods sent on cons1,000Jul31Sales1,500,Feb28Bank: carriage100Jul 31Anneth:Import duty50Distribution60Commission90Profit on consignment (transferred to P&L)20015001500

Goods sent on Consignment2013Jan 16 Consignment to Anneth1000

Bank2013Shs2013ShsJul31Angel (consignee)1300Feb28Consignment to Angel: carriage100

Angel (Consignee)2013Shs2013ShsJul31Sales1500Jul31ConsignmentImport duty50Distribution60Commission90Bank130015001500

Angels(Consignee) booksAccount of Sales(converted in Tshs) Angel, Mombasa, Kenya. 31 Jul 2013To Paul MwanzaSales of goods received on consignment1,500Less charges: Import duty50 Distribution costs30 Commission 90 200Bank draft enclosed 1, 300

Paul (Consignor)2013Shs2013ShsJul31Bank:Jul31Bank:Import duty50Sales1500

Distribution60Commission transferred to P& L

90Bank130015001500

Bank2013Shs2013ShsJul31Paul: Sales1500Jul31Paul: Import duty50 Paul: Distribution60 Paul: To settle account1300

Profit and loss account (Anneth) ShsCommission on consignmentFrom Anneth 90

Valuation of unsold stockUnsold stock should be valued, taking into account all costs incurred by both the consignor and consignee in connection with the consignment.The value of this unsold stock should be shown as a carried down balance on the consignment account. ( an asset in the statement of financial position of the consignor) Value of unsold stockCost of the goods (valued @cost/market price whichever is lower)Add: Proportionate expenses of consignor Add: Proportionate expenses of consignee (only nonrecurring expenses of the consignee ie exclude recurring/fixed costs eg Godown rent, insurance, showroom expenses, selling expenses)

IllustrationPaul consigns 100 radio to Anne. Each radio costs shs 800. Paul pays the following expenses: Freight 1000, Insurance 400, Carriage 500.Anne pays the following expenses: Custom duty 2000, unloading charges 500, godown rent 500, salary to salesman 500.Goods reach the godown of consignee. At the end of the year, 25 radio remained unsold with Anne. The market value of each radio is 850. Your required to calculate value of closing stock.

Statement showing Value of Stock

ParticularsShsShsCost of 25 radios@80020,000 Direct Expenses (i.e. 25/100)Freight250Insurance100Carriage125Unloading ChargesCustom duty5001,10021,100

Loss Of Goods On Consignment

Goods may be lost, destroyed or damaged either in transit or in consignee's store.Such loss can be divided into two parts:Normal LossAbnormal Loss

Normal LossThe loss is due to inherent characteristics of goods. E.g. shrinkage, evaporation, leakage and pilferageSuch losses form part of cost of goods and no additional adjustment is required for this purposeQuantity of such loss is to be deducted from the total quantity sent by the consignor.

Is included in the value of goods sold and closing stock by inflating the rate per unitValue of closing stock= (Total value of goods sent/Net quantity received by consignee) X unsold quantityNet quantity received = Goods consigned quantity - Normal loss quantity.

IllustrationAngel consigned 2,000 tones of coal @ shs 50 per tone Boni. She paid shs 20,000 as freight. Due to normal wastage only 1950 tones were received by Boni. Boni paid shs 5000 as unloading and carriage charges. The goods unsold amount to 650 tonesYour required to calculate the value of unsold stock

Solution

ShsCost price of 2000 tonnes of coal @ shs 50 per tone100,000Freight paid by consignor20,000Unloading and carriage charges paid by consignee5,000Total cost125,00Cost of 650 tones = 125,000 x 650= Shs 41,667 1950

Abnormal LossLoss occurs on account of reasons which are accidental, or which rarely happened. They are like theft, riots, accidents, fire, earthquake etcLosses could occur in transit or in consignee's store and solely to be borne by consignor.

The following method should be followed while valuing abnormal loss:A) Goods sent on consignment(at cost price) Shs XXB) Add: Non-recurring expenses:Consignor's expenses................ Shs XXConsignee's expenses................ Shs XXTotal cost before abnormal loss A+B..............Shs XXValue of abnormal loss = (Total cost/Total units consigned) X abnormal loss units.

If goods are not insuredFor recording abnormal loss:Abnormal loss A/C ...........Dr.To consignment A/C..Cr.(With the value of abnormal loss)For abnormal loss transferred:Profit and loss A/C........Dr.To abnormal loss A/CCr.

Abnormal Loss and InsurannceOn payment of insurance premiunConsignment a/c.DrTo bank (or consignee if he paid the premium) (With premium paid)On happening of abnormal lossAbnormal loss..DrTo consignment account(With value of abnormal loss)

On admission of claim of Insurance CompanyInsurance Company a/cDRTo abnormal loss account(With amount of claim admitted)On receipt of claim from insurance CompanyBank a/c..DRTo Insurance Company(With the amount received)

The balance, if any, in the abnormal loss represents profit or loss which will be transferred to profit and loss accountIf Profit: Abnormal Loss AccountDRTo Profit and Loss accountIf Loss:Profit and Loss Account.DrTo Abnormal Loss Account

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